The housing market is finally nearing normal. Come 2015, sales of existing homes are likely to match or top the average for 1999-2002, before housing mania seized the U.S., driving prices to unsustainable peaks. A strong rental market already has the construction of multifamily dwellings back to historical norm.
The big exception: New single-family homes. Both construction and sales of them are running at just 50 percent of their pre-bubble levels, and they won't regain those norms until at least 2017.
Demand is lagging for a couple of reasons: New homes tend to be more expensive that older ones, limiting the pool of buyers with the credit to buy them. And a paucity of first-time buyers means fewer owners of existing homes are able to sell and buy a new home.
But supply is also a constraint. Builders can't keep up even with the currently muted demand. These days, a new home typically sits on the market for just three months versus the four or five of the past.
There aren't enough skilled tradesmen…carpenters, framers and others who left the field in droves when the bubble burst.
Production of housing materials is still playing catch-up. Many lumber mills, for example, closed or cut back during the 2007-2012 decline. Similarly, supplies of drywall, concrete, millwork and the like remain on the tight side, pushing up prices.
And there are too few build-ready lots. 15 – 36 months needed to prep sites…building roads, water and sewer lines and so on, plus clearing regulatory hurdles…mean delays last long after prices turn up. Making matters worse, gun-shy lenders have been loath to give credit to all but the largest builders…just 21% of construction.
Though these pressures are easing, it will take time for them to disappear.
Meanwhile for the house marketing as a whole, several positives are at work:
- Easier credit – Lenders are becoming more comfortable with the standards for loans that can be off-loaded to Fannie Mae or Freddie Mac, soothing their concerns. (Parallel rules for mortgages can be securitized and sold will kick in next year.) So there's more flexibility on debt-to-income ratios, and minimum down payments are sliding…from 5% to 3% for Fannie- and Freddie -conforming loans, for example.
- Rising income and employment – so more consumers can afford purchases.
- A million more potential home buyers than usual – a backlog of young adults still living with their parents but eager to strike out on their own as soon as possible.
- Mortgage rates that will remain modest, despite a slow climb over 2015.
Prices are likely to increase more slowly, now that the first pendulum swing from downturn to upturn is over and investors are seeking better returns elsewhere.
Source: The Kiplinger Letter – Vol. 91, No. 44